Five Questions for Your Franchisor

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How can you predict the success of your newly opened franchise business, particularly in terms of earnings?

While a successful ‘track record’ may exist for businesses like yours and likely must, if the franchisor adopts a consistent business model for all locations; many variables contribute to the success or failure of each new location the franchisor op ens. The most important of those variables is you.

In every business there are strong operators and weak operators. Strong operators have a tendency to outperform in a franchise system regardless of location. Weak operators have a tendency to underachieve also regardless of location. As I tell franchisees: you can take a strong operator and a weak location and make it successful; however, a weak operator will never succeed, even in a strong location.

Prior to signing a franchise agreement, make sure you get the answers to these questions about future earnings:

1. CAN YOU TELL ME WHAT YOU EXPECT THIS LOCATION’S FIRST-YEAR EARNINGS TO AMOUNT TO?

You’ll wish the answer was ‘yes,’ but you’re better off if it is ‘no.’

Buying a franchise is a major investment, and because of this, many potential franchisees end up frustrated when the franchisor cannot elaborate on how much money they will be able to make running the business. However, franchisors have no desire to hide things. It’s simply the case that telling a franchisee how much money he or she may be able to make can be seen as an ‘earnings claim.’ Even using theoretical figures, this can be a misleading statement. Yes under the Arthur Wishart ACT that would be a full blown cause for recission.]

2. CAN YOU GIVE ME A LIST OF CURRENT FRANCHISEES TO SPEAK WITH?

This question is worth asking for a variety of reasons. Current franchisees are the ones executing the franchisor’s system—it is often them, not the franchisor’s representatives that have the best idea of what works and what must be worked around.

In terms of projected earnings, it is current franchisees who can give you the best estimate of your break-even point. They are not bound by the same fiduciary restrictions as your franchisor, and may feel comfortable speaking candidly. Understanding the average break-even point can give you a better indication of when you can expect to start turning a profit in the business. If you get the same answer from five or more franchisees, you can calculate a sensible average. However if the numbers you hear vary dramatically, you may want to address that with the franchisor.

Current franchisees can also be a source of reliable information about gross margins.

Variables impacting your gross margin can include the location of the business you are looking to open, rent, number of employees, inventory, etc.

When speaking with existing franchisees the best way to determine what the gross margins may be by asking for a list of their business’ ‘theoreticals’.

Theoreticals usually consist of the following expenses, and are ranked by percentage (the list provided here is only an example):

Cost of goods sold (COGS) – 30 per cent
Occupancy or Gross Rent – 10 per cent
Royalty – 6 per cent
Ad Fund – 2 per cent
Labour – 28 per cent
Utilities – 5 per cent
Debt Service – 5 per cent

These percentages are subtracted from gross sales. By speaking with franchisees you can get a better understanding of how accurate the numbers are. Unfortunately franchisors are not supposed to disclose these numbers to you as they can be construed as an earnings claim.

3. DO I GET TO SEE A BUSINESS PLAN?

A business plan for your franchise should not be given to you until you have at least two items in place: A location with a firm demographic report verifying the viability of the location. A lease that ensures the business plan numbers are accurate in taking into account the occupancy cost for expenses.

Most franchisors don’t have other variables to their cost structure other than location and rent, the rest should be. Most franchisors don’t have other variables to their cost structure other than location and rent; the rest should be easy to forecast.

Also, while a franchise agreement may be signed, without a suitable location a business can’t open. As a franchisee you should find out what part of the franchise fee is non-refundable should the franchisor not be able to find a location that is well suited to your expectations. This will also help to determine your financial exposure prior to agreeing to a location.

4. HOW DO I DETERMINE MY PROFIT?

A good franchisor should have accounting methods for you to follow for their specific business. You should be given sample sheets to prepare during your training showing you how to create a Profit & Loss statement. Helping you understand how to best manage any inventory; explaining the value of cost control and the best tools to use to manage that process.

This should all be part of the training and asking your franchisor about the depth and level of training you’ll receive in this area is very important. After all, business is fairly simple; keep your revenues high and your costs low. However, without the tools to calculate the money you are spending and the money you are collecting, you could be left in the dark.

When speaking with your franchisor, ask for samples of the sheets you will be expected to use to control your costs. Also ask for examples of the training that will be covered when it comes to managing expenses. This information will be very important as you need this type of training to run a successful business.

5. DO I IMPACT HOW MUCH I CAN MAKE?

The truthful answer is always ‘yes’. By operating at the highest level of compliance, following the system laid-out before you and continuously working at your business, you can almost always increase your earning potential.

As a rule of thumb, the strongest franchisees compose the top 20 per cent of a franchise system; the average franchisees about 70 per cent, and the weakest the bottom 10 per cent. When performing your due diligence, find out what it takes to be a part of the top 20 per cent. By doing this, you can be sure to exhibit the same business practices and attitude as other successful franchisees.

Shawn Saraga is president of Mr. Franchise, a franchise and real estate brokerage company. He can be reached via email at shawn@mrfranchise.ca or at his website www.mrfranchise.ca.

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